Proving A Timely Tax Filing

 

I admit that I am biased, but I am not a fan of filing late tax returns.

Call it Murphy’s Law:

If anything can go wrong, it will.”

I am looking at a Tax Court order. An order takes place while the case is at trial. Somebody makes a motion, the Court reviews and decides. That decision is called an order, and they are common.

The IRS filed a motion that it sent a timely Notice of Deficiency to a taxpayer.

COMMENT: A Notice of Deficiency (also called a 90-day letter, a NOD or SNOD) is the IRS determining that you owe additional tax and wanting to reduce it to assessment. Why an assessment? For one thing, the IRS (usually) has 3 years to examine and adjust your return. It has 10 years to collect an assessment. That alone is a powerful incentive.

There are rules, of course. The IRS has only so much time to send the SNOD, and you have only so much time to respond to it. In general, the IRS has three years from when you filed the return or when the return was originally due, whichever is later. There are exceptions. A key one, and one will talk about today, is if you never file a tax return.

Milton Thomas Roberts failed to file a timely return for 2014. He received a notice from the IRS in 2015 asking about it. In February 2016 he went to the post office and mailed four packages: two to the IRS and two to New York state.

COMMENT: He was filing his 2013 and 2014 taxes with the IRS and New York – hence four packages. He did so correctly: he used certified mail. Yes, it costs a few dollars, but – if you ever must prove the mailing – those are the best dollars you ever spent.

About a week later the IRS acknowledged receiving his 2013 return.

COMMENT: Having the benefit of hindsight, one wonders why the IRS did not confirm 2014. To his credit, Roberts went online and confirmed that all four packages had been delivered.

For 2016 through 2019 Robers received notices from the IRS about this tax year or that, but he never received a notice about 2014.

That changed in October 2019, when the IRS sent a notice saying it never received a 2014 return.

Roberts did not immediately respond.

In February 2020, the IRS issued a SNOD showing over $275 grand of tax due.

That caught his attention.

Roberts (re)prepared his 2014 return and sent it to the IRS on or around June 2020. It showed adjusted gross income of $587 grand and a small refund of $804.

What happened to his copy of the original 2014 sent in 2016?

No idea.

Having attracted unwanted attention, Roberts was now audited for 2014. The IRS issued a second SNOD in January 2022 for $79 grand in additional tax, along with the usual interest and penalties.

You already know they are in Tax Court. Both sides agree that Roberts filed a 2014 return. Roberts argues that he filed twice – once in 2016 and again in 2020. The IRS says: nay, nay; he filed only once and that was in June 2020.

Does it matter?

Oh, yes it does.

Remember that the IRS has three years (barring oddities) to adjust his return and assess additional taxes. Roberts asserts that he filed 2014 in February 2016. Add three years and the IRS had until February 2019 to adjust and assess.

Roberts received nothing from the IRS in 2019.

Roberts says the IRS is too late. The second SNOD is incorrect and without effect.

The IRS disagrees. They say they never received the 2014 return until June 2020. Add three years and they had until June 2023 to adjust and assess. They were easily within the window.

The IRS just filed a motion requesting the Tax Court to determine that 2014 was within the window and they had filed a correct and effective SNOD.

Judge Toro denied the motion.

Why?

There is enough doubt as to what happened. Roberts had certified mail receipts, confirmation from New York of receiving 2013 and 2014 returns, confirmation from the delivery company that all four packages had been delivered, as well as a conspicuous absence by the IRS for three ½ years concerning the 2014 tax year.

Judge Toro was not going to say that the IRS had proved their case.

Mind you, that does not mean that Roberts proved his case either.

It does mean that the case revolves on whether there was a 2014 filing in 2016.

The IRS usually has the upper hand in such matters.

But Roberts brings the receipts.

You may wonder: does the IRS sometimes lose returns?

Oh yes. They have done so with me. I remember one client specifically because it impacted a scheduled real estate closing. We resolved the matter, but it involved considerable time and stress.

I will be keeping an eye out for the resolution of the Roberts story.

My hunch: he will win.

But he is in Tax Court. He is not pro se, so he is paying for an attorney. And he will keep paying, as a motion has been decided but the case itself marches on.

Which makes me wonder: could he have avoided this by simply filing a timely tax return?

As I said, I am biased.

Our case (or motion, actually) this time is from Milton Thomas Roberts v Commissioner, Tax Court docket 7011-22.

Can A Taxpayer Be Responsible For Tax Preparer Fraud?

 

We are familiar with the statute of limitations. In general, the SoL means that you have three years to file a return, information important to know if you are due a refund. Likewise, the IRS has three years to audit or otherwise adjust your return, important to them if you owe additional tax.

The reason for the SoL is simple: it has to end sometime, otherwise the system could not function.  Could it be four years instead of three? Of course, and some states use four years. Still, the concept stands: the ferris wheel must stop so all parties can dismount.

A huge exception to the SoL is fraud. File a fraudulent return and the SoL never starts.

Odds are, neither you nor I are too sympathetic to someone who files a fraudulent return. I will point out, however, that not all knuckleheaded returns are necessarily fraudulent. For example, I am representing an IRS audit of a 2020 Schedule C (think self-employed). It has been one of the most frustrating audits of my career, and much of it is self-inflicted. I know the examiner had wondered how close the client was to the f-word; I could hear it in her word selection, pausing and voice. We spoke again Friday, and I could tell that she had moved away from that thought. There is no need to look for fraud when being a knucklehead suffices.

Here is a question for you:

You do not commit fraud but your tax preparer does. It could be deductions or credits to which you are not entitled. You do not look at the return too closely; after all, that is why you pay someone. He/she however did manage to get you the refund he/she had promised. Can you be held liable for his/her fraud?

Let’s look at the Allen case.

Allen was a truck driver for UPS. He had timely filed his tax return for the years 1999 and 2000. He gave all his tax documents to his tax preparer (Goosby) and then filed the resulting return with the IRS.

Mr. Goosby however had been juicing Allen’s itemized deductions: contributions, meals, computer, and other expenses. He must have been doing quite a bit of this, as the Criminal Investigations Division (CID, pronounced “Sid”) got involved.

COMMENT: CID is the part of the IRS that carries a gun. You want nothing to do with those guys.

Allen was a good guy, and he agreed with the IRS that there were bogus numbers on his return.

He did not agree that the tax years were open, though. The IRS notice of deficiency was sent in 2005 – that is, outside the normal three years. Allen felt that the tax years had closed.

He had a point.

However, look at Section 6501(c):

§ 6501 Limitations on assessment and collection.

(c)  Exceptions.

(1)  False return.

In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time.

The Court pointed out that the law mentions a “false or fraudulent return.” It does not say that the fraud must be the taxpayer’s.

The year was open, and Allen owed the additional tax.

I get it. There is enough burden on the IRS when fraud is involved, and the Court was not going to add to the burden by reading into tax law that fraud be exclusively the taxpayer’s responsibility.

The IRS had helped its case, by the way, and the Court noticed.

How?

The IRS had not assessed penalties. All it wanted was additional tax plus interest.

I wish we could see more of that IRS and less of the automatic penalty dispenser that it has unfortunately become.

Allen reminds us to be careful when selecting a tax preparer. It is not always about getting the “largest” refund. Let’s be honest: for many if not most of us, there is a “correct” tax number. It is not as though we have teams of attorneys and CPAs sifting through vast amounts of transactions, all housed in different companies and travelling through numerous foreign countries and treaties before returning home to us. Anything other than that “correct” number is … well, a wrong number.  

Our case this time was Allen v Commissioner, 128 T.C. 4 (U.S.T.C. 2007).

A Current Individual Tax Audit

 

We have an IRS audit at Galactic Command. It is of a self-employed individual. The self-employeds have maintained a reasonable audit rate, even as other individual audit rates have plummeted in recent years.

I was speaking with the examiner on Friday, lining up submission dates for records and documents. We set tentative dates, but she reminded me that Congress was going into budget talks this weekend.  Depending on the resolution, she might be furloughed next week. No prob, we will play it by ear.

This is a relatively new client for us. We did not prepare the records or the tax returns for the two years under audit. We requested underlying records, but there was little there for the first year and only slightly more for the second. We then did a cash analysis, knowing that the IRS would be doing the same.

COMMENT: The IRS will commonly request all twelve bank statements for a business-related bank account. The examiner adds up the deposits for the twelve months and compares the total to revenues reported on the tax return. If the tax return is higher, the IRS will probably leave the matter alone. If the tax return is lower, however, the IRS will want to know why.

We had a problem with the analysis for the first year: our numbers had no resemblance to the return filed. Our numbers were higher across the board: higher deposits, higher disbursements, higher excess of deposits over disbursements.

Higher by a lot.

The accountant asked me: do you think …?

Nope, not for a moment.

Implicit here is fraud.

There are two types of tax fraud: civil and criminal. Yes, I get it: if you have criminal, you are virtually certain to have civil, but that is not our point. Our point is that there is no statute of limitations on civil fraud. The IRS could go back a decade or more - if they wanted to.

I do not see fraud here. I do see incompetence. I think someone started using a popular business accounting software, downloading bank statements and whatnot to release their inner accountant. There are easy errors to one not familiar: you do not download all months for an account; you do not download all the accounts; you fail to account for credit cards; you fail to account for cash transactions.

OK, that last one could be a problem, if significant.

The matter reminded me of a famous tax case.

It is easy to understand someone committing fraud on his/her tax return. Put too much in, leave too much out. Do it deliberately and with malintent and you might have fraud.

Question: can you be responsible for your tax preparer’s fraud?

Vincent Allen was a UPS driver in Memphis. He used a professional preparer (Goosby) for 1999 and 2000.  Allen did the usual: he gave Goosby his W-2, his mortgage interest statement, property taxes and whatnot. Standard stuff.

Goosby went to town on miscellaneous itemized deductions; He goosed numbers for a pager, computer, meals, mileage and so forth. He was creative.

The IRS came down hard, understandably.

They also wanted fraud penalties.

Allen had an immediate defense: the three-year statute had run.

The IRS was curt: the three years does not apply if there is fraud.

Allen argued the obvious:

How was I supposed to know?

Off to Tax Court they went.

The Court looked at the following Code section:

 § 6501 Limitations on assessment and collection

(c)  Exceptions.

(1)  False return.

In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time.

The Court noted there was no requirement that the “intent to evade” be the taxpayer’s.

The statute was open.

Allen owed tax.

The IRS - in a rare moment of mercy - did not press for penalties. It just wanted the tax, and the Court agreed.

The Allen decision reminds us that there is some responsibility when selecting a tax preparer. One is expected to review his/her return, and – if it seems too good …. Well, you know the rest of that cliche.

Do I think our client committed fraud?

Not for a moment.

Might the IRS examiner think so, however?

It crossed my mind. We’ll see.

Our case this time was Allen v Commissioner, 128. T.C. 37.